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TNRH Weekly Rambling: 4/28 - 5/4/2018, Brought To You By Laurentian Research

|About: Franco-Nevada Corporation (FNV), HK, IVPAF, Includes: CLR, CXO, EOG, ESTE, LIT, MRO, NFX, PE, PXD, VNOM

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We enter the earnings report season. Halcon Resources posted excellent operational progress but the stock was sold off.

Earthstone Energy and Viper Energy, among others, both reported a great 1Q2018.

After a period of correction, some miners reached the deep value territory. Ivanhoe Mines and Franco-Nevada are examined.

Oil & Gas

We enter yet another earnings report season. The earnings expansion seems to be universal, but some reports of earnings growth are celebrated, while others got booed:

(Credit: here)

One of the reasons for the vastly differing treatment received by the E&P concerns is the emergence of the algos. The algos are great except they are not yet sophisticated enough to tell an earnings growth generated from a stable asset base from an apparent earnings shrinkage following an asset sale; they cannot incorporate future growth envisaged by the management in conference calls into their digestive tract.

Examine the following equation which governs the profitability of an oil company,

  • [Profit] = {[oil price] - [All-in unit costs]} X [Production]

The algos may be able to grasp a trend in the all-in unit costs of the E&P companies because it is relatively straightforward to deduce these numbers from the quarterly filings. However, they can be way off in assessing production growth. As to the third factor, the oil price, I haven't heard of any commodities-focused hedge funds claiming they've cracked the problem of oil price forecasting; machines apparently are not as pachydermic as some humans. In summary, the algos may be more handicapped than bottom-up analysts in evaluating E&P companies. That is especially true in the cases of those companies whose assets have gone through or are undergoing significant changes. Therefore, in the earnings report time, the algos can be terribly wrong about those companies in asset revamping, thus helping create wonderful entry opportunities for the perspicacious investors.

Halcon Resources (HK) is a case in point. The company reported excellent progress in executing their business plan and even enhanced its guidance for 2018 and 2019. Yet the stock was sold off by some 13% on the next day following the earnings report. I reviewed the company's earnings report in an article the night before the big swoon; you can find the article here.

Earthstone Energy (ESTE) also reported its 1Q2018 results. So did Viper Energy (VNOM), which is becoming a C-corp the next week to draw in more investors. I will post a review of a number of earnings reports in the next few days, so stay tuned.

Mineral Resources

In the interest of marketing TNRH, I condensed the three-piece series of articles on Ivanhoe Minerals (OTCQX:IVPAF) (see here, here, and here) into a shorter article for publication as a PRO+, which after a 7-day embargo will become available for the readers of Seeking Alpha (see here).

The article was mentioned in the SA Editor's Picks (see here). I am a follower of SA Editor's Picks. SA Editor's Picks are "the folks who pick the best articles on SA every day and share them with [us]." They send out an email with the day's best articles if you follow them.

Ivanhoe mines copper, zinc, and precious metals, which brings us to gold. There is an emerging realization among the smart money that investors should perhaps allocate a meaningful portion of their portfolios to gold, with all the warning signs ahead for markets. Naguib Sawiris, Egypt's second richest man (after his brother Nassef), who is a master in dealing with North Korea-class risks in his investing, should know about risks as well as anyone; he recently said he had put half of his net worth in gold (see here).

A sleep-well-at-night way of investing in gold is through Franco-Nevada Corporation (FNV), a gold-focused royalty and streaming company, which owns and grows a diversified portfolio of royalties and streams generated from numerous mines which it does not operate, explore, or develop. The beauty of Franco-Nevada is that it got neither Capex nor Opex and that it is intelligently diversified - the management picks the best gold mines to invest. The more I think about the company, the better I like it. You can check this company out here and here.

Is the lithium malaise finally coming to an end? The lithium sector had been in a holding pattern since 4Q2017, but Morgan Stanley's bearish view (see here) pushed it off the cliff. When I opined on October 2, 2017, that investors should be preparing for a lithium bubble pricking (see here), I was attacked by enthusiastic lithium bulls including a certain self-claimed global lithium guru. Morgan Stanley got a lot more cachet, it proves.

However, I think the lithium stocks may have found a surer footing lately. Firstly, a number of junior lithium explorers were exposed for over-marketing their stories, some having gone as far as misleading investors to believe they own tenements they actually don't; Secondly, some of the previously noisiest lithium bulls either have gone to silent meditation or lost their mojo and showed up crestfallen; thirdly, technically, the G-X Lithium ETF (LIT) seems to have found strong support above $32.50 and the uptrend launched in late 2015 may be still alive and should surpass the previous high reached in 2011, judging from the strength of the ongoing automobile electrification movement.

What I bought in the week & how does it perform?

I alert the TNRH members on buy and sell trades in two ways. I tell the members of the trade orders I am about to enter or just entered on the fly in the Chat Room; I also summarize the trades executed or unfilled during the day in the Daily Buy/Sell Alert, which goes out to members through email upon market close.

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Interesting readings

I'd like to recommend the following reading for this week:

  • This is a great read if your interest is in the large indies, such as EOG Resources (EOG), Pioneer Natural Resources (PXD), Concho Resources (CXO), Newfield Exploration (NFX), Continental Resources (CLR), Marathon Oil (MRO), and Parsley Energy (PE): "OPEC Has Venezuela, Shale Has EOG *and* Venezuela" (see here). I'm sure journalists will come up with their explanations but some of these companies got vastly different treatment in the aftermath of their 1Q2018 earnings reports (see chart above).
  • With the Iran sanctions just around the corner, the oilpatch could finally rise from its consolidation since mid-April 2018. Here is an article on Barron's - "Iran Sanctions Could Raise Oil Prices by $10 a Barrel" - for your perusal.
  • The offshore industry is turning the notoriously high-cost, long-cycle oil production into lower-cost, shorter-cycle production to compete with onshore unconventional projects, a trend that may turn the heads of the private equity funds. "OTC: Offshore industry’s turn to shorter-cycle, phased-development stirs PE interest" (see here).
  • I like the holistic approach to look at the oil price in this concise article, although the article would be on the next level if it could illuminate us on how to synthesize the five factors mentioned therein: "Oil at $75: five factors driving the price" (see here). What makes the article interesting is its departure from the usual approach of using one single factor to rationalize a general thesis, which of course has been well characterized by the parable of blind men and an elephant.

  • No stories highlight the risks of investing in a politically unstable country like the Democratic Republic of Congo better than this one: "Glencore's Congo mining conundrum" (see here).

TNRH Infrastructure

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In this old bull market, a catastrophic fall can be just around the corner. The natural resources sector - from oil and natural gas to minerals - is the lone space that is undervalued. The sector is so undervalued that it may be the safe haven you need right now. It doesn't hurt that the commodities supercycle has started; I'd like to help you profit from this once-in-a-decade opportunity.

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